Smart Money Seeking Europe Risk Cover Ripples Through Havens

Investors seeking a hedge against the political risks looming large over Europe typically buy the franc, which could prompt the Swiss National Bank to buy the euro and potentially parlay those purchases into another haven: front-end German bunds. This then pushes up the value of call options on bunds relative to puts. Some other investors seeing this then seek shelter in gold, another haven asset. And so goes the journey of smart money, moving from one safe asset to another.
These charts tell the tale of the bias to own haven assets.

Franc Reality

In the options market, call options on the franc relative to the euro are the most expensive since January 2015, when the Swiss central bank removed the cap on its currency, suggesting demand to own the franc.

Schatz Show

The yield on Schatz notes fell 20 basis points last month, coinciding with increased stress in the repurchase market. The difference between two-year German bonds and the overnight index swap rate is now at 56 basis points, compared with 40 basis points at the end of last year and eight basis points on Jan. 22, 2015, when the European Central Bank unveiled quantitative easing.

Bund Options

Demand for call options on bunds has increased steadily in recent weeks, pushing up the three-month 25-delta normalized risk reversals to zero from minus 0.25 vol at the end of 2016, near the most skewed toward puts in five years. That movement suggests that to at least a section of investors, anti-euro candidate Marine Le Pen becoming the next French president is more than just a tail risk.

Gold Skews

Though gold has rallied more than 9 percent in the first two months of the year, investors are positioning themselves for further gains. The call skew on the metal based on three-month options with futures as the underlying asset shows that the gauge is above 1, compared with a low of minus 2 after Donald Trump was elected the U.S. president.

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